Finanacial Statements

Balance Sheet
&
Profit and Loss Account

A financial statement is a collection of
data organised according to logical and
consistent accounting procedures.
Balance Sheet
Income Statement
Statement of Cash Flows
and a newer one -- Statement of
Owner Equity
Four Basic Financial statements:
Balance Sheet Purpose
Determines solvency of business-
ability to meet both long term and
short term obligations
Gives concise summary of firms
resources and obligations
Gives a measure of firms liquidity

Balance Sheet basic Principles

The balance sheet is regarded as a separate
accounting entity( entity concept)
The figures are expressed in monetary units
(monetary concept)
The balance sheet assumes that the company is a
going concern (going concern concept)
The fixed assets are stated at cost less
depreciation ( cost concept)
The current assets are stated at cost or market
value, whichever is lower (conservative concept)
Assets are equal to liabilities (dual aspect
concept)


The Balance Sheet
Name -- What does this represent?
Partnership, individual, combined
Needs to be consistent over time
Date -- This is as of what date? (Snap
Shot)
Listing of all assets and all liabilities
Balances at the bottom of form
Assets - Liabilities = Equity

XYZ Co
As on 31.3.2011
Liabilities
Current Liabilities
- Accounts payable
- Interest payable
- Salary payable
Long Term Liabilities
Equity
Assets
Current assets
- Cash
- Inventories
- Debtors
Fixed assets
Investments

Balance Sheet
Asset Types
Current assets
Consumed or converted to cash in 12 months
e.g. Inventory, prepaid expenses, cash,
savings
Long Term or Fixed assets
e.g. land, buildings, stocks
Selling would typically decrease volume or
size of business
Asset Value Determination
Book Value (cost basis)
Useful for trend analysis
Fair Market Value
Useful to determine liquidation value
Current liabilities
To pay in the next 12 months e.g. bills, accrued
interest, taxes
Long Term
Scheduled originally to be paid in more than
one year e.g. land debt, house payments
Balance Sheet
Debt Types
Parts of the Balance Sheet
(Current)

Liabilities -- What you owe someone else (against what you own)
Current Liabilities
What you are scheduled to pay in the
next 12 months
Unpaid bills, accrued interest, property
taxes
Operating loans
Principal payments on term debts to be
made in the next 12 months
Parts of the Balance Sheet
(Long Term)

Liabilities -- What you owe to someone else (against what you own)
Long Term Liabilities
What was scheduled originally as more
than one years
Land debt, house payments
Match up to the long term assets
Equity
Preferred Stock (cumulative, Non cumulative,
convertible, cumulative convertible)
Common Stock or ordinary shares
Contributed capital in excess of par
Retained earning
- Revenue reserve: from profit of normal business operations
- Capital reserve: Premium on issue of shares or gains on
revaluation of assets

Debentures
Convertible
Non convertible
How to Build a Balance Sheet
1) Do a count: Current, Long Term,
2) 2) Rupee Prices for each of the above.
Recommend both cost and market value for term
assets
3) Machinery list (depreciation schedule? Straight
line or WDV)
Cost less depreciation = book value
4) Assemble the above into the format
5) Add up the assets
6) Add up the debts
7) Assets minus debts = net worth or
equity
How to Build a Balance Sheet
Take out a Piece of Paper
Assets Liabilities
Current Current

Investments Equity
Long Term Long Term


Draw some lines and label like this:
What is the Balance Sheet?
Picture in time -- a specific point, as in
31.3.20XX.
Shows financial position--ability to handle
risk
Net result of past
Very important component to track and
monitor financial progress
Basic building block for financial analysis
What a Balance Sheet is
NOT
Does NOT necessarily tell you if the
business is making money
Does NOT tell you where net worth
came from
Change in Net Worth
due to:
Retained Earnings
from profits earned and retained in
business

Market Valuation Equity
from change in market value of assets
Valuation Equity
Rupee of asset value that are created
because the market value of term assets
is greater than the book value

Calculated by:
+ Total assets @ Market Value basis
- Total Liabilities inc. Contingent Liabilities
- Retained Earnings (contributed Capital)
Profit and Loss Account
It is a report of a firms activities during
a given period of time
It shows revenue and expenses of the
firm, the effect of interest and tax, and
the net income for the period
Functions of P& L Account
Gives concise summary of firms
revenue and expenses
Measures firms profitability
Measuring Earning
Accrual accounting:
- Identify revenue
- Matching the corresponding cost to
revenue
Revenue occurs when the earning
process is complete and an exchange
has taken place
Depreciation
It is a non cash charge used to match
expenditure of creating asset with
resulting revenue.
Three estimate are required to calculate
depreciation:
- Assets useful life
- Its salvage value
- Method of allocation (straight line, WDV)
Expense Recognition
Principle of associating cause and effect
Principle of systematic and rational
allocation (depreciation)
Immediate recognition principle (selling
and administrative expenses and all
losses